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The Downside of Globalization

Remember all those books and articles about how wonderful globalization was going to be? How it was going to make all countries rich and how, being rich, they would all become democratic, and being democratic they would all become peaceful?

Well, they were way premature if not outright wrong. Not only is globalization not working like that, but it is actually in many respects generating precisely the opposite. Far from being enriched, a number of countries, including the United States, are seeing significant declines in incomes and wealth. And while no one has yet gone to war, the strains between many nations are being exacerbated and the autocratic nations like China and Singapore appear better able to respond to the demands of the on-going global economic crisis than the major democracies.

Three recent crises — the earthquake and tsunami in Japan, the flooding in Thailand and the threat of default by Greece, Italy, Spain, and Portugal — have focused a bright light on the some of the reasons why globalization is presently not working very well.

The Japanese tsunami and the Thai flooding have not only caused enormous human tragedies, but have also underlined the fragility of the global supply chain and the risks attached to it. In the wake of the events in Japan, auto and electronics production was substantially reduced not only in Japan but also in the U.S. and Europe as well because critical parts that were made only or mostly in Japan could not be obtained. Now the Thai flooding is again shutting down production not only in Thailand but in other economies like those of Taiwan, Japan, and Singapore that rely on a few key factories in Thailand for their supplies. For example, Thailand is the world’s second largest supplier of magnetic hard drives after China. With that production now expected to fall by 30 percent, computer makers like Taiwan’s Acer and Korea’s Samsung will be hard hit.

These incidents demonstrate that while immediate costs may be minimized by the global supply chain, there is also a greater than expected risk of breakdowns that can impose ultimate costs far greater than the immediate gains earned from global component cost arbitrage. Thus re-shoring and reduced reliance on extended global supply chains rather than further globalization may be the wave of the future.

Even more meaningful is the turmoil in the EU and the Eurozone as Greece flirts with a default that could blow up the Euro and the EU for many years to come. Behind this, as the Financial Times’ Martin Wolf has pointed out, is the problem of large and chronic global imbalances in trade and financial flows. Wolf notes that countries like Japan, Germany, China, and Singapore have striven for and achieved constant and large current account surpluses and that as creditors these countries have the power to and do demand that the trade deficit debtor countries adopt austerity policies that would eventually eliminate the deficits. The problem, explains Wolf, is that all countries can’t be surplus countries because that would leave no one for buying the production of the surplus accumulating countries. Wolf is, of course, correct but while his calls for reason and comity at the G-20 meetings and for surplus countries to voluntarily reduce incentives to produce and export while deficit countries reduce incentives to borrow and to engage in spend without thought of tomorrow may be perfectly logical and commendable, they are unlikely to be heeded.

Keynes at Bretton Woods in 1944 called for automatic tariffs on exports from trade surplus countries to accompany the IMF loans that would be made to trade deficit countries. A great internationalist, Keynes argued for maximizing production in each separate country and almost seeking autonomy.

As in so much else, he was apparently correct that laissez faire, no holds barred free trade would prove to be destabilizing and perhaps even fatal to the global economy.

Before rushing to conclude more Free Trade Agreements (FTAs) perhaps we should pause to see if we can make what we have achieved so far actually work beneficially for all players.